I opened passbook savings accounts for my grandchildren at my bank last year. Not only do the accounts pay essentially no interest, but the bank recently started deducting service fees. In lieu of making a “gift” of fees to the bank, I’d like to buy stock for my grandchildren. How do I go about it?
Several brokerage firms offer custodial accounts with low minimums, no set-up or annual fees, and low or no commissions for buying and selling shares. For instance, TD Ameritrade has no fees or minimum investment and charges $9.99 for each online stock trade. Charles Schwab sets a minimum investment of $100 and charges $8.95 for online stock trades. Scottrade has a $500 minimum investment and charges $7 for online trades. Each brokerage also offers many exchange-traded funds and mutual funds that don’t charge commissions for buying and selling.
ING Direct’s Sharebuilder program has no minimums and charges $4 per trade if you sign up for the monthly automatic investment plan, which can be a good option if you want to make regular investments every few months. And if you are still interested in savings accounts for the kids, ING Direct also offers its Kids Savings Account, which carries no minimum, charges no fees and is paying 0.8% interest.
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To open custodial accounts for your grandchildren, you’ll need their Social Security numbers (each grandchild will need a separate account). Money you contribute to a custodial account is considered an irrevocable gift to the minor and can’t be taken back. You’ll need to appoint a custodian for each child’s account, who will manage the assets until the child reaches the age of majority (age 18 or 21 in most states) and takes control of the money. The custodian may be grandparents, the child’s parents or another person who will manage the assets in the best interests of the minor, says Dara Luber, senior manager of investment products and retirement for TD Ameritrade. Even if the parents end up being the custodian, grandparents may still contribute money to the account.
For more information about financial gifts for children (or grandchildren), see Tax-Smart Ways to Help Your Kids.
FAQs
Children can't open an investment account on their own. Instead, they will need to have one set up with a custodian. This custodian can be a parent, grandparent, guardian, or other adult in the child's life. Through an investment account, parents and other adults can purchase stocks for their kids.
Can I gift stocks to a child? ›
Stock shares can be gifted to recipients from an existing investment portfolio through a brokerage firm. Stock shares can also be gifted to children as a single share to teach them about money, investing, and saving.
How do you give stock as a gift? ›
Give stock from an existing investment account: Contact your broker to help make the transfer electronically or by stock certificate. Give stock with an app: Find an online app that allows you to give stock. In any case, the recipient should have a brokerage account to receive the stock.
What is the best ETF for a child? ›
Here are the top stocks (and ETFs) for you to consider buying for the child in your life this year.
- Vanguard Total Stock Market ETF (VTI) ...
- Disney. ...
- McDonald's. ...
- Microsoft. ...
- AT&T. ...
- NVIDIA. ...
- Apple. ...
- The Home Depot.
As an early step toward passing down wealth
If you're thinking about your legacy, gifting stocks can be a valuable tool, as opposed to liquidating and paying capital gains taxes. As of 2022, the IRS allows you to gift up to $16,000 per year, per person — including stock. In 2023, that number increases to $17,000.
Do I have to pay taxes on gifted stocks? ›
Capital gains tax and gifting
As previously discussed, if you give existing stock to someone else, your cost basis will transfer to them. Since you didn't sell the investment, you won't owe any capital gains taxes — and the recipient won't pay taxes until they sell the shares.
What are the tax implications of gifting stock to family? ›
You can gift existing stocks without paying capital gains tax (because you don't have to sell them). Future market gains will benefit the gift recipient. If the recipient has a low income, they may not need to pay capital gains tax when they sell.
How does the IRS know if I give a gift? ›
How does the IRS know if I give a gift? The IRS finds out if you gave a gift when you file a form 709 as is required if you gift over the annual exclusion. If you fail to file this form, the IRS can find out via an audit.
When you gift stock What is the cost basis? ›
The cost basis for taxing gifted stocks depends on their fair market value at the time of gifting and sale. The Internal Revenue Service (IRS) imposes caps on the value of stocks that can be gifted without being reported or taxed.
What are good stocks to buy for kids? ›
Here are our top picks for the best stocks to buy for your kids.
- Alphabet.
- Apple.
- Disney.
- Hasbro.
- McDonald's.
- Amazon.
- Nike.
- Mattel.
To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they'll need a parent or guardian to open a custodial account for them.
What are the tax consequences of gifting stock to family? ›
You can gift existing stocks without paying capital gains tax (because you don't have to sell them). Future market gains will benefit the gift recipient. If the recipient has a low income, they may not need to pay capital gains tax when they sell.
What is the difference between inheriting stock and gifting stock? ›
Inherited stock, unlike gifted securities, is not valued at its original cost basis—a term used by tax accountants to describe the original value of an asset. When an individual inherits a stock, its cost basis is stepped up to the value of the security, at the date of the death.
Is it better to gift or inherit stock? ›
Inheriting Stock
In general, if you have assets that have low cost basis it is usually better for your heirs to inherit the assets as opposed to gifting it to them.
How do I transfer shares from parent to child? ›
Details to be Filled - The delivery instruction slip book has to be filled in with certain details, such as:
- Name of the person receiving the gift of shares.
- Details of the donee's account.
- Stock or share to be transferred/gifted.
- The company's ISIN number.
- The amount of shares to be given as a gift.
